Gold has been under some pressure over the past few months and the selling gathered pace this week. The shiny metal fell out of favour because of reduced demand for haven assets as investors looked forward to more normal times ahead in 2021 with the developments of the vaccines. Consequently, they bought more risky assets such as Bitcoin, growth stocks and commodity dollars.
But is this the end of the bullish trend for gold, or is this a “healthy” pullback ahead of more gains in the future?
While gold may be down, the precious metal is by no means out. The long-term outlook on gold remains favourable. With a recovering global economy, jewellery demand should pick up to offset some of the weakness arising from the investment side. Inflation is expected to pick up sharply if the global recovery accelerates. This should be good news for gold, traditionally a good inflation hedge. But if the world economy does not recover so strongly, then interest rates will likely remain very low for a very long time still, thus providing tailwind support for gold and other non-interest-bearing assets. So, whichever way you look at it, the downside looks limited for gold.
In the short-term, the dollar could also help to put a floor under prices as the greenback continues to fall out of favour. Wednesday’s unemployment claims data has fuelled concerns that a renewed economic downturn has already begun because of the latest lockdowns. Many businesses have closed down during the pandemic for good and many jobs will never return. Against this backdrop and the potential for taxes to rise under the Biden administration, and even with the help of vaccines, there will be question marks over the speed of the recovery and pent-up demand in 2021. Consequently, we may not see as sharp a recovery as has been priced in by financial markets over the past several months. This should mean lower Fed interest rates for longer, keeping the pressure on the greenback and providing support for gold and silver.
Meanwhile from a technical point of view, gold is now hovering around the key short-term support level of around $1800, previously a significant resistance level. This is also where we have the longer-term 200-day moving average come into play. With the dollar remaining on the backfoot, watch out for a potential bounce there:
Source: ThinkMarkets and TradingView.com
Still, even if gold were to find support here, this does not automatically mean the low is in. For that to happen, gold will still need to form a higher high above $1880, its most recent high prior to the latest breakdown before the bulls can be encouraged to step in.
Indeed, if support at $1800 breaks, the precious metal could stage a deeper correction. In this scenario, I wouldn’t rule out a drop to the 38.2% Fibonacci retracement (against its rally from the August 2019 low to the recent record high) at $1725.